Have you been
following the nuclear disarmament talks?They
are of interest, though perhaps for an unexpected reason.Here it is:You may remember
that in a recent letter I mentioned that around 20% of our nationís electric
supply is generated by nukes.Well,
it seems that approximately 45% of the fuel that American electric plants use in
their nuclear reactors comes from decommissioned Russian atomic weapons.I offer this tidbit with no further comment.

The markets
continued their robust action during the quarter, and though the indices seemed
to hit a bit of a ceiling in December, the year saw handsome gains in the area
of 20-25%.The NASDAQ average far outran the Dow and the S&P,
gaining around 45% for the year.Bonds
were up almost as much as stocks, continuing a two-decade run over which they
have been the asset class to beat.Performance-wise
itís been a fabulous year.

But as I look back
at my best years I cannot help but notice that they generally follow years that
had sharp declines.This is a
humbling fact, but enlightening as well.

On a percentage
basis Iíve had better yearsó1988 and 1989 for example.Remember that back then we were coming off a crash year (1987), just as
this year we came off a crash year (2008).Also in 2003 we garnered strong returns, in that instance after coming
off of three bad years in a row.Thereís
a lesson in there:you can make
extraordinary returns if you are in the market after a cataclysm.The trick, of course, is to not lose so much in the downdraft that
thereís nothing left to come back with.

Another lesson is
that it takes cojones to invest into the teeth of a raging decline, but
that is when you can make the most money.To
extend this train of thought, you also need to have some cash on hand to make
those gutsy investments; thus you need to have sold something when prices were
high, or have a flow of funds available for investment.Unfortunately, history does not give us any accurate hints as to whether
next year will be equally as rewarding.

Bonds performed
almost as well as stocks last year.I
tend to look at the very long picture as an investor, so I would like to point
out the major moves in rates over the last hundred years or so:

Long-Term Trends in Interest Rates

Approx. Time Period

General Direction

Number of Years

1900-1922

up

22

1922-1945

down

23

1945-1982

up

37

1982-present

down

27

You can see that
these are tectonic movements, long and slow, and while the pattern is evident,
the variability of the time frames does not allow for any accurate assumptions
going forward.But even if you were unaware that rates were now essentially
at zero, it is still obvious that, sometime within the next few years, they are
due for an upswing.And if rates go
up, remember, bonds go down.That
is why in my bond accounts I have tended to shorter maturities.

The final lesson
from the last few years is that it pays to be balanced, that is, to hold bonds
as well as stocks.I add this
tentatively, as I am skeptical of its value in the near future. Overall,
and taken together, these observations reinforce my belief in riding out the
storms that invariably crop up in the markets.

In mid-December
came the news of the death of Paul Samuelson, 94, the Nobel-prize winning
economist and advisor to presidents.It
was his textbook that sparked my interest in economics forty-odd years ago, and
which nudged me into what was to become my lifeís work.I met Paul perhaps ten years ago; he was a tennis player and became a
member of our local club.I was
(uncharacteristically) star-struck, for his work literally changed my life.He had a sharp wit and always a twinkle in his eye.He will be missed.